Oct. 3, 2024

The Case for Independent LPAC Members

Neither GPs nor LPs seem to be particularly satisfied with the way LP advisory committees (LPACs) function. There are, of course, omnipresent complaints from LPs about underrepresentation on their funds’ LPACs and concerns about fairness, but the dissatisfaction does not stop there. As LPACs have evolved from serving advisory roles to performing a range of approval rights, GPs’ frustrations with delays and other dysfunction in the decision-making process have grown correspondingly. The SEC also indicated it had no illusions about the effectiveness of LPACs in the adopting release accompanying the since-vacated private fund adviser rules. In a guest article, Vinson & Elkins partner Robert Seber argues that the inclusion of independent members on the LPAC – i.e., members that are not affiliated with the GP or any LP – would address a number of the deficiencies in current LPAC practices, resulting in improvements to fund governance practices that would inure to both GPs and LPs. For more from Seber, see “LPAC by Design: Six Recommendations for GPs to Define LPAC Features During Fund Formation” (Feb. 25, 2020).

Compliance Practices to Overcome Recordkeeping Challenges Caused by Emojis and Video Communications (Part Two of Two)

Amidst an unprecedented flurry of enforcement actions and fines levied by the SEC for off-channel communication violations, some investment advisers have raised concerns that emojis and video conferencing platforms will be the next frontier for regulatory scrutiny. Unfortunately, the current suite of technology solutions for monitoring, capturing, and retaining emojis and video communications remains imperfect. There are, however, reasons for optimism, both in terms of approaches compliance professionals can take to mitigate those potential risks and the forecast for how regulators might treat those communication mediums going forward. This second article in a two-part series identifies challenges that emojis and video communications present for advisers attempting to record, retain and monitor those forms of technology, and suggests how advisers can bolster their corresponding compliance efforts. The first article offered an overview of the SEC’s ongoing scrutiny of off-channel communications to date, and contemplated why emojis and video communications may be areas targeted by the Commission and other regulators in the future based on recent comments and legal developments. See our three-part series on electronic communications: “Current Technological Landscape and Relevant Regulatory Measures” (Jul. 13, 2021); “Useful Training Techniques and Policies and Procedures to Adopt” (Jul. 20, 2021); and “Using Third Parties for Compliance, Mitigating Social Media Risks and Fulfilling Document Requests” (Jul. 27, 2021).

Key Benefits Offered by Hybrid Funds and Different Liquidity Mechanisms to Unlock Them (Part One of Two)

Hybrid funds have become increasingly popular as sponsors look for creative ways to provide more flexibility for investors and address issues that can limit traditional open-end and closed-end funds. Although the evergreen nature of hybrid funds can save managers time from having to constantly fundraise, they also present an array of conflicts of interest and complications that need to be weighed and mitigated. The Practising Law Institute recently hosted a panel on hybrid funds as part of its Advanced Issues in Private Funds 2024 program. The panel was moderated by Cleary Gottlieb partner Maurice R. Gindi, and featured Matthew Jill, partner and GC, private funds and secondaries at Ares Management; Barbara Niederkofler, partner at Akin; and Amelia Stoj, CCO and assistant GC at Foresite Capital. This first article in a two-part series discusses the fundraising benefits and challenges presented by hybrid funds, as well as several types of liquidity mechanisms that managers can wield to meet their LPs’ withdrawal needs. The second article will analyze other features and considerations when operating a hybrid fund, including as to LP discussions, operational challenges, management fees, carried interest, clawbacks and conflicts of interest. For additional insights from Niederkofler, see “Eleven ‘Top of Mind’ Questions and Misconceptions Surrounding the New Marketing Rule” (Mar. 22, 2022); and from Gindi, see “PE in a Recession: Tips for Tailoring Fundraising Efforts, Anticipating Demand for Secondaries and Managing Co‑Investments (Part One of Three)” (Sep. 20, 2022).

ILPA Guidance on NAV Facilities Aims to Improve Transparency and Engagement With LPs

Net asset value (NAV) facilities are secured by the value of a fund’s underlying portfolio and can be structured to cross-collateralize the equity of multiple portfolio companies. The facilities have become an increasingly popular portfolio management tool with PE sponsors, especially when other more traditional sources of liquidity are difficult to access. However, although NAV‑based facilities may be used in a way that ultimately benefits LPs, they may also give rise to conflicts of interest and certain benefits for GPs that come at the expense of LPs. Given the potential pitfalls, the investor community has expressed concerns about GPs’ lack of transparency and engagement with LPs around NAV‑based facilities. To enhance practices as to the use of NAV‑based facilities, the Institutional Limited Partners Association (ILPA) recently issued guidance (Guidance) with parameters for improving transparency, recommendations for working with existing limited partnership agreements (LPAs) and terms to be included in future LPAs, as well as a disclosure template and specific discussion points for LPs to address with GPs. This article summarizes the key takeaways from the Guidance for PE sponsors. For coverage of other ILPA guidance, see “ILPA Guidance Promotes Equitable Framework for Continuation Fund Transactions” (Jul. 27, 2023); and “How ILPA’s Model NDA Could Change Preliminary Due Diligence Practices” (Feb. 16, 2021).

What’s Next for the SEC? A Look at the Latest Reg Flex Agenda

The SEC recently issued its spring 2024 so-called “Reg Flex” agenda. The SEC’s spring 2024 regulatory agenda has 34 items, including 15 at the proposed rule stage and 19 at the final rule stage. Those in the final rule stage that are most relevant to private fund advisers are slated to be finalized by the end of October 2024. The items in the agenda most immediately relevant to private fund advisers are the planned final rules for outsourcing; disclosure on environmental, social and governance practices; and cybersecurity risk management and reporting, Christopher S. Avellaneda, partner at Schulte Roth & Zabel, told the Private Equity Law Report. Potential reproposals of the Safeguarding Rule and the Predictive Data Analytics Rule could also be highly relevant to private fund managers. This article discusses the agenda items of relevance to private fund managers, with additional commentary from Avellaneda. See “SEC’s Fall 2022 Reg Flex Agendas Offer No Relief From Relentless Rulemaking” (Feb. 23, 2023).

New Hire Strengthens Paul Weiss’ London Office

Paul Weiss has announced that investment funds lawyer David Pritchett will join the firm as a partner in its London office. His practice focuses on advising fund managers on all aspects of structuring and operating alternative investment funds across a variety of investment strategies and asset classes. For insights from Paul Weiss, see “Recent Survey Shows Market Adversity Is Tempering LPs’ Ability to Negotiate Key PE Fund Terms” (Sep. 5, 2024).